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The Euro crisis seen through 3 historical models

When Helmut Schmidt invites you to give an “Impulsreferat” (an impulsive talk to spark discussion) you 1) accept, 2) feel honored, 3) get intimidated, and then 4) do your best to be insightful in a provocative way. After all, the former chancellor, about to celebrate his 95th birthday, not only made a good chunk of history but remains one of Germany’s top intellectuals.

The other day I was indeed invited to speak before him and a distinguished group of his Nationalstiftung, a sort of think tank. The topic was “Germany’s role in Europe.”

In the debate which followed I inhaled a great deal of wisdom and an even greater amount of second-hand smoke (because Mr Schmidt, directly across from me in the picture above, was smoking throughout, as is his wont). I cannot tell you who said what, but I can tell you how I decided to get that debate going.

Three historical models

We could analyse the euro crisis and the entire European Union today through three historical precedents which each would imply a possible solution.

Using the formula “Model | Precedent | Solution”:

Leadership/hegemony | Pax Britannica or Pax Americana | Pax Germanica

Deep integration | Alexander Hamilton’s Federalism in America | United States of Europe

1) Pax Germanica

In the 19th century, Britain preserved the international system (of free trade, the gold standard, et cetera) by being that system’s hegemon. This era is called the Pax Britannica (“British peace” in Latin, harking back to the Pax Romana.)

When Britain became too weak to continue as hegemon after World War I, and America was not yet willing to take over as hegemon, the system fell apart into chaos.

Order was restored only once America became willing, after World War II and with the onset of the Cold War, to step in as hegemon. This is (was?) the Pax Americana.

What is a hegemon? Charles Kindleberger in his class book The World in Depression, 1929-1939 provided the definition. In a nutshell, it is a great power which decides to lead by putting the interests of the system above its own short-term interests in order to preserve that system, for example by being a so-called lender of last resort.

When people suggest that Germany ought to become more of a leader in the euro zone today (as we at The Economist do suggest, but this blog contains — as always! — my personal and open-ended ruminations) they have in mind a regional Pax Germanica, in which Germany in effect becomes the lender of last resort.

I see four reasons why a Pax Germanica cannot become a permanent solution:

For obvious historical and psychological reasons, the Germans do not want to become a leader (the German word is Führer) of anything again.

Whereas Germany’s business elite has a globalist and cosmopolitan outlook, Germany’s political elite is astonishingly provincial.

People in neighboring countries, even those who currently claim to want Germany to be a leader, would not actually be happy if it did become leader.

Above all, the system to be preserved — the EU — was designed specifically so that no single member country could become a hegemon ever again.

That last point needs elaboration, which I sort of provided in this essay on “the German Question”. Thomas Mann once expressed this as the question of whether Europe is to be German or Germany is to be European.

When Germany, France, the Benelux countries and Italy got together in the 1950s to start the European project, their motivations were the following:

Germany wanted to atone and be readmitted into a Western and civilized community of nations, explicitly offering to cede political power even as it regained economic power.

France wanted to keep projecting influence even as it was losing its power (and empire), especially vis-a-vis America, by accepting Germany’s offer of playing second fiddle in politics to France’s first fiddle.

The Benelux, like other small countries who joined later, wanted to gain a modicum of power simply by being part of a system in which nobody else dominated.

Italy wanted to outsource its governance to the north.

The structure that became the EU, now with 28 members, was therefore built so that no member can dominate the others. That’s why all the institutions of the EU, from the Council of Ministers to the ECB, have such complicated voting rules and why, for example, tiny Malta has the same number of votes (one) as does huge Germany on the ECB board.

There was no such system, one intentionally designed to prevent hegemony, during the Pax Britannica and Pax Americana. (The United Nations and Bretton Woods were sort of meant to be similar, but clearly were not.)

Pax Germanica therefore is simply not available.

More importantly, attempting a Pax Germanica would entail risks, as Dominik Geppert at the University of Bonn describes in a new book. (I am actually paraphrasing his views from a preparatory essay he wrote:) It would at most result in a “semi-hegemony,” in which Germany would be held responsible for maintaining the system but would not have the means of maintaining it.

This would turn the EU into a tension system. But the EU was conceived as the opposite: a peace project. If hegemony were forced onto a system meant to be non-hegemonic, Greeks might one day again hate Germans (some already do), and that’s what Germans are most afraid of.

2) United States of Europe (Hamiltonian EU)

Confronting a different but not irrelevant crisis in America, Alexander Hamilton in the 1780s conceived a vision in which a relatively loose group of 13 states were to pass their sovereignty to a new federal center.

In so doing, that new central government would take on the debts of the member states and repay them out of a new federal treasury with new federal tax revenues.

Because this constitution proved successful, the Swiss later imported it almost wholesale as the basis for their federal system, so there are at least two models out there.

Applied to the EU, it would mean:

EU taxes

an EU Treasury

EU bonds

an EU White House (the Commission), an EU Congress (the EP), et cetera.

Notice, however, that these EU bonds would have nothing to do with the “eurobonds” that are being discussed. Those eurobonds would instead be bonds issued (in the analogy) by California but guaranteed by Texas and the other 49 states jointly. Neither America nor Switzerland has, or could have, such an arrangement. Eurobonds (where Germany in effect vouches for Greece) in fact belong properly into the Pax Germanica model, not into the Hamiltonian model.

Notice that even Hamilton was not able to resolve all major questions, above all the issue of slavery, which he abhorred but had to tolerate in one group of member states. In the EU today, there are no open questions on that scale, but nonetheless very different views about how, for instance, states and markets should interact. America eventually had to fight a civil war to resolve its open question; the EU, remember, is above all a peace project.

That aside, is this model even feasible? My guess is that Germany has more people than any other large member country who would even contemplate ceding sovereignty to Europe. (I am thinking of the old guard of Helmut Kohl and Wolfgang Schäuble.) But they would still be in the minority. Elsewhere, above all in France (not to mention non-euro countries like Britain), you would be laughed out of the room for even asking.

So whereas we can all keep busy planning more shallow integration (that’s basically what the fuss about “banking union” amounts to), deep integration is also not available.

It does not matter that the constituent parts of the Empire were not democratic, as the EU’s member countries are. What matters is the way those parts share sovereignty with their union and express that in common institutions.

In a nutshell, the Holy Roman Empire after the Thirty Years War agreed to leave the question of sovereignty and integration ambiguous. Thus its laws were signed by “Kaiser und Reich”, emperor and empire, where empire meant the princes. In much the same way, the German and EU flags today fly side by side on top of parliament.

The struggle between closer union or looser union was thus resolved in favor of a looser union, rather as Britain imagines the ideal EU today. As Hamilton’s America had slavery, the Empire had the Catholic-Protestant conflict, but it defused this through loosening of the union (“subsidiarity” in the language of today’s EU). The Holy Roman Empire would never again fight about religion. (Arguably, the Catholic/Orthodox-Protestant split continues in the EU and euro zone to this day.)

Even the process and style of bureaucracy was similar: Germans today have the phrase “etwas auf die lange Bank schieben” (to shove something onto the long bench) to mean endless delays in Brussels or elsewhere. The phrase originated at the imperial diet in Regensburg, where delegates literally shoved their paperwork onto a long bench which still exists in the city hall today. (Several German Eurocrats have remarked to me that Germans, with their millennium of experience with federalism, tolerate the processes of Brussels more readily than the French or British do, with their history of centralism.)

How did the Holy Roman Empire fare in its final 160 years?

Its citizens were comparatively prosperous and free.

It constantly had problems with currencies and princes’s debts, as we do today. It kept finding new solutions, including regional currency unions (the Taler zone in the north and the Gulden zone in the south) with accompanying institutions, such as the Kreistage, which resemble our Eurogroup.

Things started going bad when two of its members, Austria and Prussia, began openly competing with each other for pre-eminence, even going to war. This was a failure of the system, which, after all, was designed to prevent a Pax Austria or a Pax Borussia and to preserve a non-hegemonic system. So there is a question about whether such systems can remain non-hegemonic indefinitely.

Weakened by that rivalry, the Empire finally proved no match for Napoleon and expired. The EU could of course face such an external threat one day (Russia?). But until then, it may just have to muddle through the way the Holy Roman Empire did during its final 158 years. That option would not be intellectually clean and satisfying. But unlike the alternatives, it might just be available.

(One more reminder: This is a personal and tongue-in-cheek thought experiment and in now way represents the editorial opinion of my employer.)

23 thoughts on “The Euro crisis seen through 3 historical models”

for an economists you omit any consideration of macro and micro (hegemony) management.
Napoleon and others preceding him showed that military might can be united, but history has repeatedly shown that military holding congress is a disaster awaiting (158 years for some)

A single force can consist of multitude of political parties, which can be regulated by their respective jurisprudence. Only a constitution has shown to behold a force together.

Interesting and entertaining! It seems as if during the entire history (and present) you recount, the fundamental issue is whether anyone is willing to give up anything to benefit the greater group rather than simply insist on watered down compromises to protect their self-interest.

The Economist sounds like a vaguely democratic institution with a dash of hegemony. How does it enforce its policies? Might it serve as a model for the EU?

It is hard to see how an ultimate sanction in the shape of military force can ever be avoided. If Britain were, for example, to ignore all economic sanctions from the EU and refuse to pay benefits to EU nationals without a qualifying period of residence, what else is left, short of military invasion?

The real barriers to union in the EU are the clash of legal systems, modern democratic expectations and the perception of an unfair distribution of financial burdens. There is no practical solution on offer to overcome them – quite the opposite.

In his book “Corporation Man”, Antony Jay asserts that the optimum number for human cooperation is eleven, based on the size of a primitive hunting-party. His conclusions derive from observations of 1970s BBC, that well-known exemplar of taxpayer-funded Europhile neutrality, paymaster, judge in its own cause and primitive hunting-party.

You might be wondering why I should have had the privilege to study cutting-edge research. The answer is that once during my days of sparse revenues, hundreds of copies of the august volume were distributed, free of charge, to commuters at London Bridge station. As a recipient of such bounty I felt honour-bound to read it. Shortly afterwards it disappeared uncannily from my bookshelves and there I was, bereft of this indispensable reference. How different my career might have been had It been close to hand at those perplexing moments when destiny for great things is affirmed or denied.

For those who feel cautioned about making the same mistakes, I see the book is available at Amazon for 66 dollars, or 2 cents if you are prepared to fumigate a used copy.

I am comforted in the thought that I have an electronic version of Hannibal and Me resting securely and forever in the vast neurological network of my Kindle Paperwhite.

Wow, so that long bench (“lange Bank”) onto which things are being shoved in order to delay them, exists quite literally in Germany to this day. I had no idea. Do you also happen to know whether — and if so, where — in the U.S. one might be able to view the original can that keeps being kicked down the road?

I’ve had ants on a stick, but I’m not familiar with the expression donkey on a stick. Sounds like Thanksgiving dinner in Nepal or someplace thereabouts.

In any case, as per my research, the actual table that all options are on was reportedly pawned off by Thomas Jefferson for the purpose of settling a tallow debt. (Its trail, alas, has since been lost.)

More to the issue at hand, has it never occurred to anyone that the specter of an overly dominant and hegemonic Germany could be greatly tempered if the country were simply split in half?

“……..it may just have to muddle through the way the Holy Roman Empire did during its final 158 years. That option would not be intellectually clean and satisfying. But unlike the alternatives, it might just be available……”

This seems the best solution, on the assumption that the EU as a sort of Holy Roman Empire would last as long as 158 years.

We can only imagine what the world will be like in 158 years, and any imaginings will almost certainly turn out not as imagined. “Flexibility” (like “Grease”), then, will be the word. So, how better to be flexible than by just muddling through.

Hi Everyone,
I see we are back for a holiday reunion, be it Christmas, Winter Solstice, holiday, Hannukah, Kwansa or whatever. It’s good to snuggle up at the Hannibal Blog.
Anyway, the central problem, as I see it, is the concept of EU. That was the first mistake that Germany made. To assume that Italians or Greeks or Spaniards would work like Germans or Dutch or whoever, is well…a topic for a Coen Brothers’ film. Really.

Watching the Greeks schedule their protests online, while millions of Germans are going off to work, pains me.

Work ethics aside, Germany cannot rescue these other countries. That would be tantamount to social welfare. Sure, I’m all for helping the mentally ill, those who cannot help themselves…do we include Greece in that equation?

In Prague several years ago, I was struck with the work ethic of the Czech people, so glad to be out of Soviet rule.

What we have here is a “failure to communicate…” I’m sure Christopher will remember what film those words came from.

I personally, and most Germans, are of course very reluctant to use arguments based on work ethic. I know, Weber and all that.

Did you realize, btw, that in Germany today, it is the Protestant areas that are relatively poorer and have more unemployment and crime, and the Catholic areas, especially Bavaria, that are fully of Mormon-like worker bees?

Anyway, lots of Greeks are really hard-working and lots of Germans are really lazy. I think it’s more about how human nature interacts with a system or culture…

The realities are that Greece is underperforming and Germany is not.
While there are anecdotal exceptions in each country, the fact remains that several countries in Europe are spending more than they are generating and the notion that the deficits created by such policies will be paid by the producing countries infuses the EU with tensions that will be its undoing.

I, of course, favor a version of the American Constitutional form. However, I suspect it would not work in Europe easily and create a climate which might lead to war. What I see in the EU today seems similar to the U.S’s initial attempt: the Confederation (Articles of Confederation model) where states were, perhaps, too independent and there was a weak central governing body incapable of resolving differences. A strong central government is, I think, essential to any political entity, especially one that is made up of nominally independent states. But the dynamics of the U.S. in the late 1700’s are much different than the dynamics of a modern Europe.